Migration and the minimum wage

Few policies generate as much disagreement among economists as the minimum wage. In 2014 for example, two petitions relating to the US federal minimum wage were published online: one proposing an increase in the minimum wage, which was signed by around 600 economists, and another opposing any increase, which was signed by approximately 500 economists. Supporters of the minimum wage claim that it shores up the wages of the lowest paid workers, whilst having little distortionary impact on the labour market. Detractors retort that it is a poorly targeted anti-poverty measure, which exerts sizeable distortionary effects on employers hiring, pay and investment decisions. 

For many years there was a near consensus among economists that the minimum wage reduces employment among low-skilled workers. The argument is quite simple: in a competitive labour market, workers get paid the marginal product of their labour; the marginal product of some workers’ labour may be lower than an arbitrarily defined minimum wage; it is not profitable for employers to pay workers more than the marginal product of their labour; since employers seek to maximise profits, they will not hire workers whose marginal product is less than the minimum wage. As the progressive economist Paul Krugman, who now favours raising the minimum wage, said in 1998:

So what are the effects of increasing minimum wages? Any Econ 101 student can tell you the answer: The higher wage reduces the quantity of labor demanded, and hence leads to unemployment.

In the same article, Krugman went on to note that “this theoretical prediction has, however, been hard to confirm with actual data”. And indeed, many economists’ reading of the literature now seems to be that any disemployment effects from the minimum wage are negligible. For example, in 2009, Doucouliagos and Stanley conducted a meta-analysis of over 60 different studies, and found that the most precisely estimated elasticities of the minimum wage clustered around zero. In a 2013 poll of the IGM Economic Experts panel, very few of the 34 economists who responded disagreed with the statement, "the distortionary costs of raising the federal minimum wage to $9 per hour and indexing it to inflation are sufficiently small compared with the benefits to low-skilled workers who can find employment that this would be a desirable policy." It should be noted, of course, that other economists, such as Neumark and Wascher, as well as Meer and West, have mustered considerable evidence to the contrary. 

There could be several reasons why many (though by no means all) studies have unearthed relatively small disemployment effects from the minimum wage. First, most markets for low-skilled labour are monopsonistic, meaning that prior to minimum wage increases workers were actually getting paid less than the competitive wage. Second, employers respond to an increase in the minimum wage by: cutting hours, trimming fringe benefits, reducing the wages of higher-paid employees, raising prices, lowering employee turnover, encouraging employees to work harder, or simply tolerating lower profits. Third, the lowest-skilled workers who are put out of work by the minimum wage subsequently sort into jurisdictions with lower minimum wages.

This third possibility was recently investigated by two economists, Martin and Termos, in a paper published in the journal Economics Letters. Using data from the US, they examined whether workers tend to move from areas where the minimum wage is comparatively high to areas where it is comparatively low, holding other things (such as distance, relative incomes and relative housing costs) equal. They found that the difference in minimum wages between two areas is a significant predictor of the volume of migration from the area with the higher minimum wage to the area with the lower one. Moreover, the effect they observed was significant for low-skilled workers, but not for high-skilled workers. This is consistent with the out-migration being due to a difference in minimum wages rather than to some factor affecting the entire distribution of workers (e.g., a local economic slump), given that the vast majority of high-skilled are paid more than the minimum wage. The authors conclude by noting:

Under competitive labor markets, a higher minimum wage will reduce the demand for low-skilled labor. The most reasonable explanation of our result is therefore that workers preferentially move to locations where the demand for their labor is highest.

They go on to point out the implication of their findings for public policy:

Since cross-country emigration is more difficult than migration between states or cities, increases in the federal minimum wage will have a stronger negative effect on low-skilled employment rates than we might expect from experiments with local minimum wages.